Tax on Sale of Primary Residence

 Capital Gain on Sale of Primary Residence


What is a primary residence?

Primary residence is your home you bought at least two years ago and lived /used it for at least for 2 years out of preceding five years.

Sale of primary resident is taxable however, Section 121 allow you to exclude certain portion of your gain if you meet both ownership and use test. That mean you are taxed to certain gain but not all, if you fulfill the requirement under the section.

Let me simply it.

In case of filing married joint you can you can exclude gain up to $500,000 and $250,000 in case of other filing status.

Ownership test:

To take the exclusion you must have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.

Use test:

You must have used you home as primary resident for 24 months out of last 5 years.

However, the ownership and the use can be different time period with in the last 5 years. It is worthwhile to remember that you cannot take the exclusion if you took the exclusion the sale of another home during the two-year period prior to the sale of your home. That means you can take this exclusion only after two years. 

Example: Ownership and Use test

You bought a home on September 15, 2020. You sold it on October 20, 2022. Two years has passed so ownership test is satisfied. However, you must have used (lived) in that home for last two years to claim the exclusion.

You bought a home in 2015, and lived there during 2019 and 2020 full year. Since you satisfy ownership test and use test in last 5 years, you can claim the exclusion.

Example of Exclusion

Bought home for $450,000

Sold for 1,200,000

Improvements made: $175,000

Selling Expenses: $80,000

Capital Gain:  $495,000

Capital gain on sale of primary resident – Married Filing Joint: $0 (Zero)

Capital Gain on sale of primary resident – Other fliers:  $245,000

Tax Rate on the Capital Gain – Primary Resident

The capital gain is 0%, 15% and 20%. Most of the tax payer falls under 0% to 15% unless they hit the highest marginal tax rate of 37%. There is 3.8% of Net Investment income Tax, that may also apply to you depending up on the level of income you have.

Points to ponder:

1.     You can convert your second home to primary residence by living there for two year.

2.      Wait two years to claim the exclusion.

Contact a tax professional to learn and plan on sale of your primary residence. Consultation with a good practitioner can save huge tax.

 

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